NJ Court Holds Condominium Association Has Standing to Sue Contractors and Subcontractors for Consumer Fraud and Common Law Fraud

Port Liberte Homeowners Association, Inc. v. Sordoni Construction Co.
2007 N.J. Super LEXIS 168, Docket No. A-2138-04T1 (App. Div. June 4, 2007)

The New Jersey Appellate Division was asked to consider whether a condominium and a homeowners association, not in existence at the time misrepresentations and fraudulent omissions were made to the developer of a condominium development, had standing to sue contractors or subcontractors who made such misrepresentations. Relying on the statutory scheme of the New Jersey Condominium Act, N.J.S.A. 46:8B-1 et seq., (“Condo Act”) and the Planned Real Estate Development Full Disclosure Act, N.J.S.A. 45:22A-21 et seq. (“PREDFDA”), the Appellate Division held that the associations had standing to sue.

Port Liberte Homeowners Association, Inc. and Port Liberte Condominium Association I (collectively, the “Association”) sued a variety of contractors, subcontractors and material suppliers for defects which were allegedly causing water and structural damage to the common elements of the condominium development run by the Association. The Association settled with all parties with the exception of Dryvit, a supplier of certain EIFS products. The Association moved to amend its complaint to assert claims against Dryvit for violations of the New Jersey Consumer Fraud Act (“CFA”) and common law fraud and the trial court permitted the amendments. Dryvit, in turn, moved to dismiss the amended complaint, in part, on the ground that the Association did not have standing to sue because the Association was not in existence at the time of the alleged misrepresentations or omissions. The trial court concurred with Dryvit and dismissed the Association’s amended complaint. The Association appealed from that decision.

On appeal, the Association argued that because the developer and original sponsor of the Project, Port Liberte Partners (“PLP”), had filed for bankruptcy and turned over the property to the Association, the Association had standing to sue because it “stepped into the shoes” of PLP. Dryvit argued that the Association did not have standing because the Association did not exist at the time of the alleged misrepresentations and therefore did not receive and could not have reasonably relied on the misrepresentations and omissions.

In reaching its decision in favor of the Association, the Appellate Division engaged in an analysis of the formation of a condominium development under New Jersey law. Under the PREDFDA, a developer of a condominium must register the condominium with the New Jersey Department of Consumer Affairs (“DCA”). This DCA registration process, the Court explained, serves as constructive notice to contractors and subcontractors that any representations made to the developer will be viewed as having been directed to the association once the association takes over control of the condominium. To hold otherwise, the Court said would be unfair and would be directly contradictory to the statutory scheme which expressly permits the association to institute suit on behalf of the association members for damages to association’s common elements. The Appellate Division also favorably cited cases in New Hampshire and California where the courts analyzed similar statutory schemes and in which those courts previously decided this issue in favor of associations.

The Court further explained that the CFA itself provided support for the fact that the Association had standing to sue Dryvit. Specifically, the CFA provides that any person who has “suffered an ascertainable loss” may assert a claim against a person engaged in unlawful actions under the CFA. Relying on prior interpretation of the CFA, the court explained that no direct contractual privity was required in order for the Association to sue Dryvit. Because of the legislative scheme of the Condo Act, the Association and PLP are considered one and the same once PLP turned the condominium over to the Association and, therefore, reliance by PLP is assumed by the Association. By virtue of PLP’s registration of the condominium with the DCA, Dryvit had construction notice that representations to PLP would be passed down to the Association as well as standing to sue. Accordingly, the Association had standing to sue for consumer fraud.

For similar reasons, the Court found that the Association had standing to sue for common law fraud. Explaining that the Association need not have heard the statement forming the misrepresentation in order to sue for common law fraud, the Court noted that the Association merely needed to demonstrate that it was an intended recipient of the misrepresentations. Again turning to the DCA registration process, the Court opined that the Association had standing to sue for common law fraud because Dryvit had constructive notice that the Association was an intended end-user of the products which were the subject of Dryvit’s alleged misrepresentations and omissions.

The Appellate Division’s ruling affirms the concept that condominium and homeowner associations have standing to sue third parties on behalf of its members for damages due to defective common elements. Contractors, subcontractors and suppliers should be cognizant of the fact that their exposure for damages is not limited to the developer with whom they direct contract or make representations, but that the association later formed and to whom the developer hands control of the development may also seek damages for claims that arose prior to the association’s formal existence.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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